Mexico’s central bank raises key rate again
Mexico’s central bank pulled the monetary trigger again Friday, raising its benchmark interest rate to 8.25% in a bid to shoot down inflation.
The hike in the overnight lending rate, from 8%, was the third since June, underscoring the Bank of Mexico’s aggressiveness in responding to rising consumer prices. A recent bank report indicated that inflation might continue to accelerate in the country through the end of the year.
Still, the bank signaled Friday that a slowing economy and falling commodity prices may reduce the need for more tightening this year.
“Although worldwide inflationary pressures remain elevated, some improvement is envisioned in the medium term, given the recent decline in raw materials prices,” the bank said in a statement.
The value of a Mexican peso edged down Friday by a hundredth of a U.S. cent to 9.82 cents from 9.83 cents Thursday.
Like much of the world, Mexico has been struggling with rising prices for food and fuel. The nation’s annualized inflation rate hit 5.39% last month, the highest level in about 3 1/2 years.
That’s modest compared with the double-digit increases bedeviling other Latin American countries such as Argentina, Nicaragua and Venezuela. But with a long-term inflation target of just 3%, Mexico’s central bank has hiked rates repeatedly to damp inflationary influences. Workers squeezed by inflation often press employers for higher pay, which can fuel a vicious circle of rising wages and prices.
But, by making credit more expensive, higher interest rates tend to retard economic growth. Credit card delinquencies are soaring in Mexico. Past-due balances topped 18.8 billion pesos in June, up 28% from March, according to central bank figures.
After a strong start to 2008, Mexico’s gross domestic product growth is flagging. Unemployment is rising. Some analysts said the central bank had stepped too hard on the brakes, virtually guaranteeing deceleration in the second half of the year.
“The slowdown of the Mexican economy will not be the result of the recessionary U.S. business cycle but rather an induced event by the Mexican central bank,” said Alfredo Coutino, Latin America analyst with Moody’s Economy.com. The bank, he added, has prescribed “an extra dose of monetary medication to an economy that does not suffer of a chronic inflation disease.”